These directions of a manufactering company are thinking of issusing `Rs 20` crore worth additional debentures expansion of their production capacity. This will lead to an increase in debt equity ratio from `2:1` to ` 3:1` What are the risks involved in it ? Explain any four factors other than risk do yo think the direcations should keep in view.

Explanation

The increase in debt equity ratio from 2 : 1 to 3 : 1 is subject to following risks:
(a) Interest on debt has to be paid even when the company is not making sufficient profits
(b) The debenture holders have charge over the assets of the company, so there is threat of insolvency.
Apart from risk, the directors must keep in mind the following factors before taking this decision: Explain factor kept in mind while deciding the capital structure of a company,